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NYSE, Nasdaq to Tighten Rules for Daytraders
December 12, 1999 2:11 am EST
By Elizabeth Smith
NEW YORK (Reuters) - The New York Stock Exchange and the Nasdaq market on
Friday moved to make it more difficult for day traders to buy and sell
stocks "on margin" amid growing concern about the ripple effects of
speculative trading.
The nation's two largest stock markets, in a rare joint announcement, said
they would seek to place day traders in a distinct, high-risk group that
would be faced with stricter margin requirements than long-term investors.
Industry groups, along with some traders, hailed the decision as a prudent
measure to keep amateur investors from sustaining massive losses in what
most would describe as a high-risk investing game.
"This is a protection for the brokerage firm, which of course would be an
indirect way to protect the investors," said Elise Walter, chief operating
officer of NASDR, the National Association of Securities Dealers's
regulatory arm.
"There has been sort of a mismatch in the traditional ways margin rules work
and the way they apply to this relatively new scheme of trading," Walter
said.
Day traders focus solely on short-term gains, buying and selling highly
volatile stocks within a single day at the risk of massive losses. They
typically close out positions at the end of each day, leaving only cash in
their account.
This style of investing came under fire after 44-year-old Mark Barton killed
nine people at two brokerages in Atlanta. Barton, a day trader who racked up
more than $150,000 in losses, also killed his family and later committed
suicide.
Such investors are not typically members of the NYSE, although they often
rely on NYSE-member firms to clear their trades. A higher percentage of NASD
member firms, however, do engage in day trading.
The NYSE and Nasdaq are seeking to define day traders as investors who move
in and out of a single stock more than four times within five days in one
specific margin account.
The initiative on the part of the markets follows a recent decision by the
Federal Reserve to leave national minimum margin requirements unchanged. The
Fed allows investors to borrow up to 50 percent of a stock purchase. For
example, an investor who wants to purchase $100 worth of stock can borrow up
to $50 for that deal.
The NYSE and NASD proposals would force day traders to maintain a minimum of
$25,000 at all times in their margin accounts, versus $2,000 for other
margin account holders. Day traders currently only have to keep $2,000 in
their accounts.
The high-risk group would also only be able to invest up to four times the
amount of equity they hold in an account at any time during the trading day.
If a day trader violates that limit, his borrowing privileges would be cut
to only double the value of the equity in his account. Also if he fails to
make good on a margin call, he would only be able to invest with their own
cash for a period of time.
"I think it is a good thing to make sure people aren't betting their last
dollar on trading," said Ron Shear, chief executive of Carlin Financial
Group, a New York firm that services professional traders. "For lots of
people this is too much like a game. This firm never takes people with less
than $25,000."
The Securities Industry Association, Wall Street's main trade group, also
lauded the move, saying the NYSE and the Nasdaq were acting in the best
interests of investors.
The North American Securities Administrators Association (NASAA) also gave
its thumbs-up to the proposed rule changes.
"Day trading is a very risky behavior and higher margin requirements may
help reduce potential losses," NASSA President Bradley Skolnik said.
The NASD and the NYSE said they would submit the proposed rule changes with
the Securities and Exchange Commission, the federal agency that has to
approve market rule changes. The SEC typically puts out a proposal for
comment before making a final decision. The process can take several months.
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